Economists Issue Statement Questioning German Austerity Policies

Economists Issue Statement Questioning German Austerity Policies

German Unemployment Caused Mainly by Tight Monetary Policy

For Immediate Release: September 29, 1999

Eighty-one economists from across the United States issued a statement today expressing their concern over the austerity policies proposed for Germany by Chancellor Gerhard Schroder. These policies call for reductions in Germany’s Social Security benefits, unemployment benefits, and other forms of social welfare spending. The savings will be used primarily to finance reductions in the personal and corporate income tax.

The economists argued that the widespread view that the United States enjoys low unemployment because of greater "flexibility" is largely a myth. Rather, the United States enjoys low unemployment mainly because of a relatively expansionary monetary policy under Alan Greenspan, and an integrated national credit market. By contrast, the German and European Central Banks have pursued tight credit policies, the effect of which is compounded by poorly developed credit markets in Europe’s poorer countries.

The statement cautions Germany against the view that the high degree of wage inequality in the United States and a weak social safety net are necessary for obtaining low unemployment. It points out that aspects of the safety net in the United States, such as the earned income tax credit and the minimum wage, have actually been increased as the unemployment rate has declined.

The letter also points out that the portrayal of the United States as a hugely dynamic economy and Germany as a stagnant moribund economy is entirely a myth. Data from the United States Bureau of Labor Statistics, the OECD, and other sources, show that Germany has consistently enjoyed more rapid productivity growth than the United States over the last two decades.

The signers include many prominent economists, most notably Ray Marshall, the Secretary of Labor in the Carter Administration. Other prominent signers include Jeff Faux, the President of the Economic Policy Institute, and James K. Galbraith, the author of Created Unequal and Professor at the Lyndon Johnson School of Government at the University of Texas.